Depreciation and Capital Cost Allowance
Business purchases of capital equipment cannot be written off immediately, but rather must be expensed over an extended period of time. For purposes of the financial statements, the company may have its own policy for depreciation as long as it is applied consistently from year to year. This normally involves an assumption for the useful life of the asset within the company, and then depreciating it over that useful life. For example, a certain type of specialized equipment used by the company may be determined to have a useful life of 12 years, and therefore the company chooses to write off the cost of this equipment equally over the 12 years following initial purchase.
For income tax purposes, the government has set up fixed rates of capital cost allowance (the term used for depreciation for tax purposes) that must be used even if they differ from the rates used in the financial statements of the company. The government rates are mostly on a declining balance basis, meaning that the amount written off each year is determined by applying the fixed rate to the original cost less all accumulated depreciation over the years since original purchase. Furthermore, the CCA is determined by grouping all similar assets into an asset class. For example, if the company owns several trucks, they are all depreciated together as a group, at the rate designated for trucks. In the year of original acquisition of the asset, the rate is normally one-half of the normal rate for the applicable asset class-and then the full rate resumes in the second year.
The tax rules are a bit more complicated when an asset is disposed of, but the general rule is that the proceeds of disposition are subtracted from the asset class before the CCA rate is applied to the class for the taxation year. Please contact Simkover and Associates at 905-943-4046 if you need further accounting services or advice in relation to this topic. Click here for additional contact information
Depreciation and Capital Cost Allowance | Simkover and Associates Chartered Accountants